Money Market Review and Outlook

Rates in the money market trended lower this week on the back of the high level of liquidity in the banking system, buoyed by the FAAC allocation which hit the system last Thursday. Financial system liquidity rose to N250.3bn on Monday from N207.2bn last Friday. NIBOR rates, on average, moderated 1.2% to 15.4% on Monday, although both the Overnight (O/N) and secured Open Buy Back (OBB) rates rose slightly by 17bps and 42bps to 8.5% and 9.3% respectively, attributable to the OMO auction floated by the CBN on Monday. The OMO floated on Monday and the subsequent one on Tuesday however received no bids, despite the prevailing high liquidity in the market. We believe this reflects the preference of dealers for more liquid and higher-yielding instruments in the light of the ongoing TSA implementation which has restricted financial system liquidity to an extent.

Rates rose to week highs on Wednesday as liquidity was moderately tightened due to the Naira provisions by Deposit Money Banks (DMBs) made 48hours before the currency auction scheduled for Friday. The OBB and O/N consequently rose to 10.2% and 9.8% at market close on Wednesday. A total of N172.9bn of T-bills which matured on Thursday were rolled over via 91 days, 182 days and 364 days tenured bills issued at marginal rates of 10.0%, 13.5% and 14.7% respectively. An additional N114.9bn of OMO bills further matured into the system, boosting liquidity in the market on Thursday. Hence, rates moderated from the week high, with the O/N and OBB closing at 7.5% and 8.3% on Thursday; but rose to 8.2% and 8.8% on Friday due to an OMO auction. W-o-W, average NIBOR, O/N and OBB moderated to 15.0%, 9.3% and 8.6% from 26.0%, 48.4% and 51.2%. Barring any OMO auctions in the coming week, we expect money market rates to trade within single digits next week as we anticipate the maturity of OMO bills worth N101.5bn from two tenors.

Treasury bills market was bullish last week as the money market was liquid. Average yield across tenors declined progressively in the week up until Thursday when it spiked marginally as investors sold-down to take position in the Thursday Primary Market Auction (PMA). Average yield closed at 15.7% on Friday, 0.1% increase relative to last week's close of 15.6%.

Foreign Exchange Market Review and Outlook
The Naira held firm at N199.1/US$1.00 at the Interbank market this week -- a level at which it had been pegged since February 2015 when the Central Bank of Nigeria (CBN) adopted an order-based approach and terminated bi-weekly Dutch Auction sales of FX to importers. The CBN has continued to intervene at the clearing rate of N197.00/US$1.00 to moderate volatility swings and also restricted importers of some items from accessing FX at all segments of the market.
A combination of the demand management measures of the CBN and probably increase in accruals have resulted in an uptick in external reserves which rose US$2.0bn from June to rising more than US$31.3bn as at September 2nd. However, the bearish sentiment in the crude oil market appears to be long-drawn-out, which is a headwind to external reserves accrual and ability of the Apex Bank to defend its exchange rate peg. The market is already pricing in this risk as the local unit is currently trading at N222.30/US$1.00 at the 9-month onshore forward market whilst parallel market spot rate has fluctuated between N215.00 and N240.00/ US$1.00 in the past one month.

We imagine that the mettle of the CBN to defend this currency peg will be tested in the medium term as the economy recorded a second consecutive deficit in its current account in Q1:2015 (US$3.6bn), whilst prospects for foreign portfolio flow remains ebbed as foreign investors participation in the capital market has reduced significantly due to FX concerns. However, the CBN will be relieved with the recent commencement of production at the Port-Harcourt and Kaduna refineries. We believe this is positive for FX accrual as imports of petroleum products takes a sizeable chunk of foreign exchange utilization. In the short term, we expect the currency to remain at the current level at the interbank market while the CBN will continue to maintain its current clearing rates.

Bond Market Review and Outlook
Sentiment was mixed across term structure in the bond market this week, as the short to mid-term rates mostly rose whilst long term rates declined, save for the JUL-2034 and NOV-2029 instruments. The bearish sentiment at the short end of the curve consequently led to a 0.2% W-o-W increase in average yields across tenors to 15.9%. This is consistent with the performance we have observed in recent past, with short and long term rates converging in the bond market, owing to higher risk pricing of short to mid-term tenured instruments. Bearish trading on short to mid-term instruments peaked on Thursday as some investors sold-down to take position at the T-bills PMA held the same day.

Activity level in the market was tempered at the start of the Week on Monday as most institutional investors closed books for the Month of August. Activity however improved the rest of the trading days, with trading activities concentrated on four trading benchmarks: APR-2017, JAN-2022, MAR-2024 and JUL-2034. We continue to see opportunities and significant upside potential in the Nigerian bond market, especially at the short end of the curve where most instruments are trading at a significant discount. The elevated risk of a probably currency devaluation has been a major drag in the market, especially foreign investor participation, even as global monetary policy appears broadly accommodative. The US Fed is expected to hold off on raising rates this month whist the ECB has committed to maintaining loose monetary policy due to the fragility in global growth. This may be enough to swing sentiments positive in emerging market bonds markets, whilst the continuous lull in domestic equities market indicates the fixed income market will remain attractive for domestic investors seeking to preserve value. However, in the absence of a review in the foreign exchange rate which the CBN is presently committed in defending, the FX risk perception of the Nigerian market will remain high, and hence yields will continue to trend at the present high levels.

Source: Afrinvest Research